Evaluating your asset options

HAVING received that fat performance bonus, the task is now to decide what to do with it.

While some persons would have laid careful plans for their gift, in anticipation, others are now trying to figure out how to allocate their windfall.

The level of wiggle room allowed by investment options is, for some, a trigger for indecisiveness.

Many persons want to put away a little something but need to know that, in the event of an emergency, they can put their hands on ready cash.

The concern therefore becomes, should the bonus remain in your savings account as live cash, or should you put it in a fixed deposit?

Answer:

According to the experts, there is no simple yes or no answer for this situation.

Your personal circumstances should determine which form of liquid assets-- cash and other short-term money market products -- would work better for you. And, as advised by Sterling Asset Management's Marian Ross, one should be guided by a determination of their cash flow and savings needs.

Brian Frazer of Scotia Investments noted that cash and liquid assets are important components of a portfolio.

"They are utilised in varying degrees based on the investor's risk profile, time horizon and objectives," he said.

However, while it may give some amount of comfort to keep cash, Frazer said it is worth noting that "cash delivers the lowest returns" though it carries the least amount of risk.

So which is better?

Cash is likely to lose value over time as inflation reduces its purchasing power. But liquid assets — such as money market, unit trust, or mutual funds and repurchase agreementsn — which can have varying degrees of risk since their values can change daily, assist in maintaining purchasing power and can provide better returns than cash in specific periods.

"None (liquid assets or cash) is better than the other; it all depends on individual needs and circumstances," Frazer said.

Which is right for you?

If you desire a car by year-end, it would not be wise to encash your bonus cheque and simply leave it in your savings account where you will only earn an average of two per cent interest for the year.

"Someone with short-term goals or cash needs will have to maintain more cash and less-risky liquid assets," Frazer said in debunking the notion that maintaining cash has set advantages over money market funds.

By Frazer's reckoning, a person a year from retirement will have a greater need for cash in the short; term as well as a parent who may have to pay school fees for their children every few months.

For this reason, he suggests flexible options in liquid assets, such as Scotiabank's money market fund and Scotia premium money market fund.

"They offer no lock-up periods and funds can be easily accessed," he said.

Available Options:

So, consider a 30-day, 90-day or 180-day repurchase agreement or one year treasury bill priced at $5,000 and above, held at 28, 91 or 182 days as flexible investment options, said Mayberry's Kwame Smith.

The lock-in periods for these products allow much more flexibility than stock or bonds and do not incur much penalties for early redemption should the need arise.

A $100,000 certificate of deposit (CD), held for 30 days, is also a good option, according to Smith.

Maintaining liquid assets therefore makes it easy to sell and access funds, while creating a sense of comfort and security in your saving ability.

The decision on the length of time to hold your liquid assets depends on your economic outlook.

"If persons anticipate that interest rates will decline, they may look to holding these assets for longer tenures," Frazer said.

But if they anticipate that interest rates will increase, there is always the option of a shorter tenure.

These two factors will help determine which liquid asset best suits your needs.

The value of maintaining cash or money market funds is therefore seen in the design of your purpose.

The question therefore is, what desires drive your financial design?

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